82% of businesses go bust because they ran out of cash.
As the saying goes, "cash is king".
So here are 9 KPIs to avoid
going out of business:
As the saying goes, "cash is king".
So here are 9 KPIs to avoid
going out of business:
These 9 KPIs should act as an early warning signal for potential cashflow problems.
The goal is to respond as early as possible to rectify the situation before it becomes unsalvageable.
The goal is to respond as early as possible to rectify the situation before it becomes unsalvageable.
🔹 Days sales outstanding (DSO)
Formula = (Accounts Receivable / LTM Credit Sales) x 365
Measures how quickly you’re getting paid based on the terms you’ve set.
This should be below your set payment terms which signals that your customers are paying on time.
Formula = (Accounts Receivable / LTM Credit Sales) x 365
Measures how quickly you’re getting paid based on the terms you’ve set.
This should be below your set payment terms which signals that your customers are paying on time.
🔹Days payable outstanding (DPO)
Formula = (Accounts Payable / LTM Purchases) x 365
Measures how quickly you’re paying your suppliers.
High ratios usually signal that your cash is tightening and you’re struggling to pay suppliers.
Formula = (Accounts Payable / LTM Purchases) x 365
Measures how quickly you’re paying your suppliers.
High ratios usually signal that your cash is tightening and you’re struggling to pay suppliers.
🔹Cash Conversion Cycle (CCC)
Formula = (Days Inventory Outstanding + Days Sales Outstanding) - Days Payable Outstanding
Measures how quickly you can convert your inputs into cash.
The lower the ratio, the better. For most businesses, between 30-60 days is decent.
Formula = (Days Inventory Outstanding + Days Sales Outstanding) - Days Payable Outstanding
Measures how quickly you can convert your inputs into cash.
The lower the ratio, the better. For most businesses, between 30-60 days is decent.
🔹Gross Margin (GM)
Formula = (Revenue - Cost of Goods Sold) / Revenue
Contracting gross margins is often one of the earliest signs that there is trouble brewing.
It can either mean that you're having to discount to make sales or it's costing you more to produce.
Formula = (Revenue - Cost of Goods Sold) / Revenue
Contracting gross margins is often one of the earliest signs that there is trouble brewing.
It can either mean that you're having to discount to make sales or it's costing you more to produce.
🔹Working Capital
Formula = Current Assets - Current Liabilities
Measures whether you have the ability to meet your short-term obligations (e.g. pay your suppliers).
Your working capital should be a positive number.
Formula = Current Assets - Current Liabilities
Measures whether you have the ability to meet your short-term obligations (e.g. pay your suppliers).
Your working capital should be a positive number.
🔹Current Ratio
Formula = Current Assets / Current Liabilities
Similar to Working Capital, it measures your ability to meet near-term obligations but is expressed as a ratio.
If the Current ratio is below 1, it could be a sign that your business is in financial difficulty.
Formula = Current Assets / Current Liabilities
Similar to Working Capital, it measures your ability to meet near-term obligations but is expressed as a ratio.
If the Current ratio is below 1, it could be a sign that your business is in financial difficulty.
🔹Sales to Working Capital Ratio
Formula = LTM Sales / Working Capital
Measure how efficient the business is using its working capital.
The higher this ratio, the better.
Best measured against historical performance.
Formula = LTM Sales / Working Capital
Measure how efficient the business is using its working capital.
The higher this ratio, the better.
Best measured against historical performance.
🔹Quick Ratio
Formula = (Current Assets - Inventory) / Current Liabilities
Similar to the Current Ratio but removes the impact of Inventory so only your most liquid assets are included.
Use this if you have high inventory to get a clearer view on your liquidity position.
Formula = (Current Assets - Inventory) / Current Liabilities
Similar to the Current Ratio but removes the impact of Inventory so only your most liquid assets are included.
Use this if you have high inventory to get a clearer view on your liquidity position.
🔹Inventory Turnover
Formula = Cost of Goods Sold / Average Inventory
Measures your how quickly you're selling your inventory.
A lower ratio could mean that demand is slowing and to be careful to building up a higher than optimal inventory balance.
Formula = Cost of Goods Sold / Average Inventory
Measures your how quickly you're selling your inventory.
A lower ratio could mean that demand is slowing and to be careful to building up a higher than optimal inventory balance.
TL;DR
9 KPIs to avoid getting caught without cash:
Quick Ratio
Current Ratio
Working Capital
Gross Margin (GM)
Inventory Turnover
Cash Conversion Cycle (CCC)
Days sales outstanding (DSO)
Sales to Working Capital Ratio
Days payable outstanding (DPO)
9 KPIs to avoid getting caught without cash:
Quick Ratio
Current Ratio
Working Capital
Gross Margin (GM)
Inventory Turnover
Cash Conversion Cycle (CCC)
Days sales outstanding (DSO)
Sales to Working Capital Ratio
Days payable outstanding (DPO)
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I've helped CEOs scale businesses quickly with minimal fuss - one of which grew from $10M to $150M in revenue.
DM me “2x” and let’s talk.
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That's a wrap!
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